Latin America’s Growth Picks Up After Decades of Failure

Latin America, like most of the developing world, has been recovering much faster than the United States and other high-income countries from the world recession. The Latin American and Caribbean region grew about 6.1 percent in 2010 and is forecast to grow 4.7 percent this year; as opposed to just 2.8 percent growth (2010-11) for the United States. So the prognosis for the region is relatively good, although less than average (6.5 percent in 2011) for the low-and-middle income countries worldwide. But is worth looking at the current economic situation in historical perspective for a moment, because some historic changes have taken place that hardly anyone has noticed.

Buried in the historical memory hole is an experience of profound importance in Latin America, one that continues to shape events every week and has important implications for much of the rest of the world today. From 1980-2000, Latin America suffered its worst long-term economic growth failure for at least a century. During these two decades, income per person – the most basic measure that economists have of economic progress – grew by about six percent. For comparison, in the prior twenty years, from 1960-1980, it grew by 91 percent.

It was this unprecedented economic growth failure that gave rise to the situation that we see today, where left governments now preside over the majority of the region, including Brazil, Argentina, Venezuela, Bolivia, Ecuador, Uruguay, Paraguay, and other countries. And it is because of this prior failure that many of these governments – as well as others that are not necessarily left-of-center – have begun to move away from some of the “neoliberal” policies that coincided with this long economic malaise. The neoliberal policy changes were strongly supported, sometimes even coerced, by Washington institutions, including the U.S. government, the International Monetary Fund (IMF), and the World Bank. The failure of these policies has also contributed to the growing political distance between Latin America and Washington.

BackgroundFor those who follow the media, it is fascinating to see that although journalists have had more than a decade to notice this most important driving force of political change in Latin America, there has not been an article about the subject in a major news outlet such as the New York Times, the Washington Post, the Wall Street Journal, the Financial Times, or other publications. Of course it would difficult and complicated econometrically to estimate how much any particular neoliberal policy change – including more independent central banks, tighter (and sometimes pro-cyclical) fiscal and monetary policies, an indiscriminate opening up to international trade and capital flows, and the abandonment of economic development strategies – individually contributed to the growth failure. But one would think that the failure itself would have been a major topic for discussion, something that deserves some attempt at explanation. Yet it has been avoided, perhaps because there is an underlying assumption, especially in Washington, that policy changes promoted by the U.S. must be successful.

It would be difficult to overstate the importance of this long-term policy failure. Brazil would have European living standards today, instead of 42 million people living on less than three dollars a day, if it had continued to grow at its pre-1980 rate. So would Mexico, and there would very few Mexicans interested in coming to the United States to look for work.

Now we have finally had a decade of better growth in Latin America, although it has not caught up with its pre-1980 growth. For the decade 2000-2010, per capita GDP in the Latin American and Caribbean region grew by an average of 1.9 percent annually, as compared with 0.3 percent for 1980 to 2000, and 3.3 percent for 1960-1980.

Some of this renewed growth is a result of the world economy, which – except for the world recession of 2009 – grew faster in the past decade. But some is the result of better policies. Argentina, for example, had a disastrous recession from 1998-2002, after becoming the “poster child” of neo-liberal reforms, and suffered through a number of IMF agreements. But in 2002, the government sent the IMF packing, defaulted on its foreign debt, and adopted a number of heterodox macroeconomic policies opposed by most of the economic establishment. The economy shrank for just one quarter after the default, devaluation, and collapse of the banking system – then grew a remarkable 63 percent over the next six years.

There are other less dramatic examples of policy changes that led to increased growth – Bolivia, Ecuador, and Venezuela, for example, have all benefited from increased national control over their hydrocarbon resources. Brazil has in the last few years begun to increase its public investment.

AnalysisThe United States government has reacted badly to these changes in government and policy. In extreme cases it has supported coups against democratically elected governments (Venezuela 2002,Haiti 2004) or supported coup governments (Honduras 2009). These policies have failed in their efforts to drive a wedge between what Washington considers “tolerable” left governments and “bad” ones – on the contrary, the region is more united than it has ever been, and is currently forming a new hemispheric organization excluding the U.S. and Canada.

Unfortunately the U.S. Congress, which in the past had served as a check on the interventions of the executive branch in Latin America, has in recent years often taken even more aggressive foreign policy postures than the executive.

These policies are wrong and will only produce more blowback. The United States should accept that Latin America has embarked on a new, more economically successful and politically independent course, and respect the sovereignty of the region and the individual countries.